We conduct an exploratory analysis of how researchers can address the issue of ?construct validity?, which poses a major challenge to all studies of the effect of corporate governance on firm performance. Many corporate governance studies rely on aggregate governance ?indices? to measure underlying, unobserved governance. But we are not confident that we know how to build these indices ?
often we are unsure both as to what is ?good? governance, and how one can proxy for this vague concept using observable measures. These are construct validity questions. As the basis for analysis, we begin with our prior work, in which we build governance indices in four major emerging markets (Brazil, India, Korea, and Turkey). In that work, we argue that one must build country-specific indices, which use country-specific elements that reflect local norms, local institutions, and local data availability. We show that these similar-but-not-identical indices predict firm market value in each country and when pooled across countries, in firm fixed-effects (FE) regressions with extensive covariates. This approach puts great stress on the construct validity challenge of assessing how well a governance measure matches the underlying concept. We address here what can be said about how well these four country-specific indices, and subindices for aspects of governance such as board structure or disclosure, measure unobserved, underlying actual governance quality.
This article offers a theory of mutual fund voting to answer when mutual funds should vote on behalf of their investors and when they should not. It argues that voting authority for mutual funds ought to depend upon: (1) whether the fund...Read more
Firms can issue stocks classified in many ways. They can be classified in respect to voting rights, dividend rights, redemption rights, conversion rights, and many others. In this study, we ask if it is desirable to give greater freedom to firms...Read more
After decades of de-prioritizing shareholders' economic interests and low corporate profitability, Japan introduced the JPX-Nikkei400 in 2014. The index highlighted the country's "best-run" companies by annually selecting the 400 most pro table...Read more
Passive investors — ETFs and index funds — are the most important development in modern day capital markets, dictating trillions of dollars in capital flows and increasingly owning much of corporate America. Neither the business model of passive...Read more